February PCE: The End Of "More Of The Same"

Precursor And Prelude To War's Inflationary Price Shocks

Consumer price inflation fell exactly in line with Wall Street’s expectations, according to the February Personal Income and Outlays report from the Bureau of Economic Analysis

From the preceding month, the PCE price index for February increased 0.4 percent. Excluding food and energy, the PCE price index also increased 0.4 percent.

From the same month one year ago, the PCE price index for February increased 2.8 percent. Excluding food and energy, the PCE price index increased 3.0 percent from one year ago.

Year on year, the numbers aligned with Wall Street as well as Trading Economics almost perfectly.

Even core inflation fell right in line with Wall Street’s projections.

While the numbers may have been in line with Wall Street’s expectations, the Cleveland Fed’s InflationNow nowcast was more noticeably off the mark, under-assessing inflation by 0.1pp year on year for the headline and core numbers.

Still, February’s inflation data on the surface presented no surprises whatsoever. On the surface, February’s inflation data was, like January, “more of the same.”

We should enjoy that. Next month will be a completely different situation. Whatever else we can see in the February PCE data, one thing is already clear: most if not all of the trends within will be ended by the war with Iran and the energy price shock it has delivered to the world.

Yet when we peel back the layers, we see that inflation was already ramping up even before the start of the war with Iran. Energy prices were up, and durable goods prices especially were up. Consumption was up. Disposable personal incomes were down.

Even before the first bombs fell in Operation Epic Fury, February’s inflation data were precursor and prelude to the inflation shocks coming in March and April.

Headline Numbers Were Predictable…And Predicted

When the data meets expectations, finding a meaningful comment becomes a bit of a challenge. We talk about surprises. Normalcy invites little in the way of discussion.

On the surface, the PCE inflation data did meet expectations. Headline inflation remained the same, with the core data year on year printing a slight decline.

Month on month, the top level data looked even better. Headline inflation was up, but core inflation cooled.

On the surface at least, things are not looking bad with respect to consumer price inflation, although if this were the whole story we would again have to wonder if the US economy was slipping into stagnation.

PCE Price Index Shows Little Change. That's A Problem

As is always the case with economic data, however, this is not the whole story.

Energy Price Inflation Returns

When we dig deeper into the details we begin to see some pricing shifts in energy and durable goods, but also increased consumption.

The most notable shift was the return of energy price inflation.

This is not surprising, given oil’s steady rise throughout February.

February saw an across the board increase in energy prices, with crude oil, diesel, and reformulated gasoline all rising approximately 10% on the month.

When market energy prices are rising across the board, there is little left to pull prices back down again.

Food price inflation also heated up incrementally in February, rising from .23% to .25% month on month.

The combined impact of both rising energy price inflation and food price inflation for February was to hold the headline inflation metric constant even as the core metric ticked down.

Durable Goods Prices Jumped

Drilling into core inflation for February, the most significant part was the dramatic increase among durable goods prices of more than 1% month on month.

Even nondurable goods prices were up significantly, an increase magnified by January’s flirtation with deflation.

By comparison, service price inflation cooled significantly, falling by half to 0.21% month on month.

As is always the case, there are a multiple of forces which can combine to push prices up. Perhaps the most noteworthy force for February was the rise in consumption, especially for durable goods.

With a significant rise in durable goods consumption, we should not be surprised that the increased consumption resulted in bidding up durable goods prices. That consumption rose overall further reinforces this possibility.

Rising consumption is broadly a good thing, as rising consumption largely translates into economic expansion and growth.

However, for February the rising consumption was not matched by rising real disposable personal income (RDPI). Against the incremental increase in consumption is a fairly substantial drop in disposable personal income.

The income drop is disconcerting. Not only does it presage the decline in weekly paychecks reported on the March Employment Situation Summary, the decline was the second largest since Donald Trump took office.

This was the continuation of an unpleasant trend, as real disposable personal income has been in decline since at least 2024.

One does not need to hold a PhD in economics to realize that declining disposable incomes will at some point put a constraint on how much consumption can increase. Potentially, this would explain why consumption peaked in late 2024 before trending down even before Donald Trump took office.

One reason stagflation hypotheses have lingered is because of declining metrics such as real consumption expenditures. When circumstances result in zero growth or very little growth for consumption, economic growth is simply not happening.

March Will Break All The Trends

February saw signs that inflation was heating up in parts of the economy. The jump in durable goods especially was an indicator that inflation overall might be heating up even if just somewhat.

While the rise in consumption is, broadly speaking, a good sign, the drop in disposable personal incomes is not. The ongoing decline in disposable personal incomes is a distinctly worrisome trend. Lack of disposable personal income is a constraint on consumption, and it is distinctly possible that constraint has played a role in keeping inflation trending down in this country.

However, we know that March will not be the continuation of any such trend. Thanks to Operation Epic Fury and the war with Iran, we already know that March inflation will be significantly higher, and driven mainly by energy prices.

The End Of The Islamic Republic: Chaos Reigns

Wars are disruptive that way. We would anticipate that even without considering the impact of rising crude oil and diesel prices that we have seen throughout March. Even without consumption, even with a constraint on consumption from falling disposable personal income levels, the energy price shock from the war with Iran is going to reshape price levels and inflation across the whole of the economy.

We already know much of this because we have already seen some of the price shifts in real time.

While one month does not a trend make, the inevitable war-driven surge in consumer price inflation will force us to consider whether and to what degree a stagflation scenario might be unfolding in the US economy.

Powell Says No Stagflation — But He's Wrong

While the stellar jobs numbers for March work against such a scenario for March, labor markets have been toxic and dysfunctional for long enough that any dramatic and sustained surge in prices starts to look an awful lot like the 1970s, when rising unemployment collided with rising consumer prices. Certainly February’s PCE data does little to dispel such concerns.

If the war with Iran continues to drag on, and especially if the recently and still quite fragile ceasefire fails to hold, we might see inflation and unemployment combinations that look distressingly stagflationary. The inflation data from both January and February leave that possibility very much on the table.

The key word in that assessment, of course, is “if”.

If the war with Iran reiterates anything for us it is to not get ahead of the data. We know the March Consumer Price Index data will show surges in headline, energy, and core inflation. We do not know if April will bring major corrections to the March jobs data, nor do we know how long the inflation surge will last. We will not be concerned with stagflation if the inflation metric goes up and then goes right back down in the subsequent month.

Will we get back to something like February’s data once the war with Iran is over? That we do not know, and cannot know.

If oil prices remain elevated for whatever reason, we will not be returning to February-like numbers on inflation and consumption even after the war with Iran is over.

If oil prices drop down to pre-war levels, a return to February-like numbers on inflation and consumption is not at all out of the question.

February was the end of several trends regarding inflation and economic growth. We can see looking back that it was a precursor and prelude to the inflationary price shocks coming on from the war with Iran.

March will bring a jump in consumer price inflation. March may bring significant shifts in both income and consumption. We do not know what April will look like at all.

The fog of war is extending into the economics of wartime.